Margins and financial leverage in European engineering: the evolution of the automotive-defense transition

Summary

Between 2022 and 2025, Defense/Aerospace is the sector that expanded its operating margin the most among the seven monitored (+6.6 percentage points of EBITDA margin), while Automotive is the one that eroded it the most (−6.2 points). The gap is not only in profitability: Automotive is also the only sector in which financial leverage rose over the same period, while everywhere else it is stable or declining — a combination of falling margins and rising debt worth flagging as a sign of stress, not just sectoral transition. Behind this gap are three recognizable geopolitical forces — the war in Ukraine, the revision of the EU's internal-combustion-engine regulation, and the US-EU tariff dispute — acting as accelerators of a structural transition already under way.

1. The sample

The benchmark covers 81 listed European stocks spread across 7 engineering sectors: Automotive, Defense/Aerospace, Construction/AEC, Energy, Electronics/Semiconductors, Mechanics/Automation, and IT/Software (the latter added as an additional financial comparison, not present in the employment taxonomy of the companion report). Rail/Naval is excluded: the universe of pure-play listed European companies in this segment is too small (~7-8 companies at most) to support a homogeneous comparison with the other six.

Data: Yahoo Finance, 2022-2025 history (a structural limit of the free source — not extendable beyond 4 annual periods without moving to a paid provider). Every Sector×Year point with fewer than 3 companies with valid data is excluded from historical charts and rankings, to avoid a single stock being mistaken for a sector average.

2. Margins by sector: expansion and contraction

Change in average sector EBITDA margin, from the first to the last period with at least 3 companies with valid data (2022→2025):

Defense and Automotive sit at the two opposite extremes — 12.8 points separate the sector that expands the most from the one that erodes the most. This is not an isolated single-year event: the trend is consistent across the entire 2022-2025 window on both EBITDA and EBIT margin. Dedicated deep dives: Defense/Aerospace sector page and Energy sector page.

3. Financial leverage

The most significant finding does not concern Defense, whose leverage is expected given the margin expansion, but Automotive: it is the only sector in which financial leverage rose over the period — Equity Multiplier from ~3.2 (2022) to ~3.5 (2025) — while everywhere else it is stable or declining. A sector that erodes margins and simultaneously increases relative indebtedness presents a combination worth flagging explicitly as a sign of financial stress, not just sectoral transition: a company in this position has less room to absorb further shocks (tariff, regulatory, competitive) than a sector simply going through a down cycle.

4. The Electronics/Semiconductors case

The Electronics/Semiconductors sector shows the second-sharpest margin erosion in the sample after Automotive: −3.5 points of EBITDA margin between 2022 and 2025, with EBIT margin falling from around 24-25% (2022) to around 17% (2025). On a sample of 9 companies, above threshold in every year of the window, the figure is not attributable to a statistical artifact, but to a structural trend.

The result is significant against a widespread hypothesis: if the expectation were that artificial intelligence is shifting value toward European chipmakers, this sample does not confirm it, and in fact points the other way. The figure is more consistent with Asian competitive pressure on European manufacturers of mature semiconductors (Infineon, STMicroelectronics, ASML, ASM International, Soitec, AMS-OSRAM, Besi, Aixtron, Siltronic) — a theme distinct from the AI narrative and just as worth reporting.

5. The geopolitical context: three forces that explain the gap

5.1 The war in Ukraine and European rearmament

Russia's invasion of Ukraine (February 2022) is the sharpest turning point for Defense: it coincides almost exactly with the start of the 2022-2025 window in which the sector shows the largest margin expansion in the sample. The rise in European military spending — the NATO 2%-of-GDP target, the European Commission's ReArm Europe plan — is not just political narrative: it translates into concrete orders for Rheinmetall, Leonardo, Thales, Hensoldt, the very stocks leading the margin expansion in the sample analyzed.

5.2 The EU's internal-combustion-engine regulation: the December 2025 revision

On 16 December 2025 the European Commission proposed revising the ban on new internal-combustion car sales set for 2035: instead of a 100% emissions cut (effectively an absolute ban), the new target is 90%, with the remaining 10% offsettable through low-emission steel or synthetic/biofuels. Hybrids, plug-in hybrids, range extenders and even traditional combustion engines will be able to continue being sold beyond 2035, under certain conditions.

The proposal still needs to be ratified by Parliament and Council (likely according to observers, but not yet formalized at the time of writing), and the Commission has already announced a further revision in 2026. The interesting point is not "the EU softened the rule" but why: the pressure came directly from the German and Italian governments, with the explicit argument that the social fabric tied to automotive risks unraveling. The regulation does not cause the automotive margin erosion measured in this report, but its revision can be read as a political symptom of that same erosion, reflecting the sector's difficulties rather than a favorable condition.

5.3 US-EU tariffs: a still-unstable picture

The July 2025 US-EU trade agreement had set a tariff ceiling of 15% on European exports (including cars and components), reducing the burden compared with the theoretical 27.5% that would have applied under the full Section 232 regime. The agreement took effect on 1 July 2026. But the picture remains unstable: in May 2026 the Trump administration threatened to raise tariffs on European cars to 25%, accusing the EU of failing to honor its commitments — an accusation rejected by Brussels. At the time of writing the dispute is unresolved.

The point to keep in mind: European automotive is facing simultaneously three pressures — the electric transition, Chinese competition, US tariff uncertainty — while Defense faces essentially one, and in the opposite direction (more spending, not less). It is a structural explanation, not just an anecdotal one, of why the gap in the financial ranking is so wide, and of why Automotive is also the only sector to increase leverage over the same period (section 3): a company under pressure on three fronts at once has less room to reduce debt.

Company focus — Volkswagen over a decade-long horizon

Notes

Methodological appendix

The financial data presented in this report comes from Yahoo Finance (via the yfinance API) on a sample of 81 listed European stocks spread across 7 engineering sectors, with 2022-2025 history. To ensure that every sector average genuinely reflects a group of companies and not the isolated figure of a single one, Sector×Year points with fewer than three companies with valid data are excluded from historical charts and the margin-change ranking. The decade-long historical deep dive on Volkswagen and on FCA (now part of Stellantis) was built from primary sources — official annual reports and 20-F filings — rather than third-party data aggregators, to ensure maximum traceability of the figures reported.